Warren Buffett: Gold Vs. Stocks

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Dear Reader,

My friend Marin Katusa once responded to a question of if he’s a gold bug with, “I’m not a gold bug, I’m a profit bug.” Of course, Marin has also advocated gold ownership, but as he’s told us in many interviews, physical gold is insurance, not the end-all solution to one’s investments.

Others, like Warren Buffett, claim to hate gold when compared to stocks, a story that is overblown, in my opinion, because the fact is that gold is gold and stocks are actual businesses.

What’s never mentioned in regards to the famous Buffett interview where he trashes gold vs. stocks is that he was actually trashing all currencies, including the dollar, and then went on to say that he also doesn’t like gold for the same reasons.

Here is an excerpt from that interview from Buffett himself:

“Investments that are denominated in a given currency include money-market funds, bonds, bank deposits (cash), and other instruments. Most of these currency-based investments are thought of as ‘safe.’ In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.”

There’s not a single headline about this famous billionaire declaring how bad the U.S. dollar has been for investors. Instead, commentators used it to attack the yellow metal exclusively.

The truth is that when comparing gold to stocks, it’s simply not an apples-to-apples comparison. Gold is money. It’s a currency, and if the CNBC pundits want to compare gold to something, compare it to the U.S. dollar or any of the other 3,000-plus fiat currencies that are no longer in existence.

Stocks are active businesses; they are investments. So, of course, the returns should be better than just holding money.

The comparison is never truly fair to gold because the major indexes are constantly being updated annually, removing bad companies and adding in robust ones. Gold has proven itself to be the king of money and an honest store of value.

Its job isn’t to compound, or even grow in value – its role is to preserve your wealth.

In his book Stocks for the Long Run, Jeremy Siegel showed a chart where $1 in gold bought in 1802 was worth $4.52 today. Stocks, however, had climbed from $1 to $704,997. That’s phenomenal, and I hope the same happens for the next 200 years.

I should point out that at least for the last 40 years, the U.S. Treasury has taken a very direct role in manipulating the price of gold down.

For 4 decades in the U.S. (1934 to 1974), gold was also illegal to own! And it’s been pretty clear that the same forces that keep gold down do everything they can to keep the Dow trading higher. So Mr. Siegel’s data may not be as solid as he thinks.

In the end, it doesn’t matter. Gold is insurance. It’s money. It is a precious metal.